(Bloomberg Gadfly) -- Recent moves by a handful of fundmanagers to offer performance-based fees are a welcome development.Hopefully, others will embrace the trend.

But the new fee structures need to be designed to ensureportfolio managers have enough skin in the game to be truly in syncwith the interests of those whose money theysteward.

Fidelity International (the international arm of FidelityInvestments until becoming independent of its U.S. parent in 1980)provided a diagram of its new fee structure this week, withoutspecifying actual levies.

As I suggested earlier this week, I would go further. Here'show.

At some level of underperformance versus the benchmark, the fundmanager should earn nothing in fees.

While it makes sense for the baseline management fee to behigher than a comparable passive product fee -- after all, thereshould be some compensation for the increased cost involved inan actively managed product -- any underperformance shouldlead to a fee reduction that rapidly punishes the active fundrelative to a passive alternative.

The following chart is based on one Fidelity published earlierthis week; I've augmented it to show both where active fund feesshould be in relation to passive fees, and to remove the floorFidelity suggests for underperformance.

Here's the chart:

AllianceBernstein Holding LP already offers U.S. products withperformance fees and is mulling European launches, as is AllianzSE's Global Investors unit. Orbis Investments, which manages about25 billion pounds ($33 billion), has offered funds to U.K. retailinvestors since 2014 that provide refunds if a manager beats thebenchmark only to subsequently lapse into underperformance.

As welcome as the shift to tying what investors pay to how wella manager performs, it's not a new idea. Three years ago, aresearch paper by the Cass Business School in London examined threedifferent fee models. The study differentiated between fixed fees,asymmetric performance fees that have a fixed and performanceelement, and symmetric fees dictated by performance alone.

The study argued that charging a fixed fee "encourages managersto grow their asset base beyond the level that is consistent withsustaining `superior returns.'" Bad performance, meanwhile, is lesslikely to be punished by investors withdrawing funds.

The asymmetric performance fees charged by many hedge funds,meantime, could be described as `heads we win, and tails youlose,'" the Cass study argues. The so-called "two-and-twenty"model, for example, charges 20 percent of positive returns, and 2percent of assets under management. So no matter how badly a hedgefund performs, it's guaranteed at least 2 percent in levies.

The conclusion of the paper was quite stark:

Investors, in the majority ofcases, would prefer symmetric fee structures. Only when an investoris certain (before investing) that an investment manager is veryskilled and takes a lot of risk would investors prefer fixed fees.The theoretical literature is therefore largely supportive ofsymmetric fee structures as a way of aligning manager and investorinterests.

It's worth noting that the decision to offer a different choiceof fee structure isn't just driven by a Darwinistic desire to fendoff the flow of money fleeing to low-cost tracking funds. Increasedscrutiny by regulators, including the Financial Conduct Authoritywhich is the U.K. industry overseer, is also spurring reform.

Here's what Fidelity International said this week in the pressrelease announcing its decision to introduce active equity fundswith fees tied to whether those funds outpace their benchmarks(emphasis mine):

These changes will more closelyalign the performance of our business with the performance of ourclients’ portfolios and deliver what we believe clients andregulators are looking for.

The investment management industry has feasted for too long onopaque fees and hidden levies. Explicitly calibrating managementincome with performance would expose poor performersto some Schumpeterian creative destruction.

By pledging a zero management charge for active portfoliomanagers whose returns are far below what a low-cost tracker fundcan achieve, fund managers can regain the faith of investors andregulators that the interests of principals and agents in thesocially essential business of providing for retirement are trulyaligned.

This column does not necessarily reflect the opinion ofBloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering assetmanagement. He previously was a Bloomberg View columnist, and priorto that the London bureau chief for Bloomberg News. He is theauthor of “Complicit: How Greed and Collusion Made the CreditCrisis Unstoppable.”

To contact the author of this story: Mark Gilbert in Londonat [email protected] To contact the editor responsible forthis story: Edward Evans at [email protected]

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